Bank of Canada holds rates, says Canadian dollar still a risk

Tue Jan 19, 2010 9:03am EST
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OTTAWA (Reuters) - The Bank of Canada held its key interest rate unchanged on Tuesday, as expected, and revised slightly downward its growth outlook for this year, saying the weak U.S. economy and strong Canadian dollar remained a threat to recovery.

The central bank maintained its overnight lending rate at 0.25 percent and repeated its conditional commitment to hold them at that level until the end of the second quarter.

Its view of the Canadian economic recovery remains largely the same as in the October Monetary Policy Report. However, it now expects 2010 growth of 2.9 percent compared with 3.0 percent previously and 2011 growth of 3.5 percent compared with 3.3 percent. It believes the economy contracted 2.5 percent in 2009 versus its previous forecast of a 2.4 percent decline.

The bank sees the economy returning to its full capacity and inflation returning to the 2 percent target in the third quarter of 2011. In December, it had said this would occur in the second half of that year.

The economy ran at 3 1/2 percent below its production capacity in the fourth quarter, it said, saying "considerable excess supply remains".

The bank made no explicit mention of an eventual exit strategy from a period of record low rates but it did continue adjust its term purchase and resale agreements to shorten maturities to the end of the second quarter, in line with its low rate commitment. (Reporting by Louise Egan; Editing by Randall Palmer)

<p>The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie</p>